Drug store mergers heat up as retailers defend against the Amazon threat

Among retailers, health and personal care stores were one of the bright spots in our latest Retail Report 2017.

Just like supermarkets, health and personal care stores climbed one point to an ACSI score of 79. While that doesn’t match the 82 of internet retailers, it’s a high score, and the improvement points to the results of both M&A and preparations for Amazon to enter the space.

But that vote of confidence from customers is just the prelude to a shake up that the industry’s many mergers are creating.

The leaders shed points, but still lead

Kmart pharmacies and Kroger were tied at a score of 80 at the top of the health and personal care industry. However, both saw their ACSI score fall in 2017, with Kmart pharmacies shedding 4 points and Kroger down 1 point. Kmart pharmacies did show significant improvement in service quality, and both brands improved in meeting customer expectations.

CVS customer satisfaction powered by and preparing for mergers

CVS was right behind the leaders at a company-best 78. It was the most improved in the category, gaining 2 points, and one of only two large chains to improve over 2016.

Acquiring Target pharmacies may have boosted CVS’s customer satisfaction scores. When dividing CVS’s score into CVS and Target pharmacies, Target stands at a score of 80, while CVS sits at 77.

The health care retailer’s possible merger with Aetna is suspected to be a preemptive move to counter the threat of Amazon, which may begin selling prescription medicine. Whether this merger will boost customer satisfaction – or even go through – remains to be seen.

Rite Aid split among Albertsons and Walgreens

Rite Aid, which fell 1 point in 2017 to a score of 77, is in the middle of being purchased.

Walgreens is snatching up 1,932 Rite Aids (it tried to buy all of them before antitrust scrutiny led to a scaled-back deal). And now Albertsons plans to buy the remaining 2,500 Rite Aids, further expanding its footprint after merging with Safeway in 2015.

It seems many of the health and personal care stores toward the bottom of the ACSI rankings are banding together in hopes of better serving customers and getting ahead of Amazon’s potential entrance in the market.

Walgreens gained a point in 2017 to tie Rite Aid at 77. Safeway pharmacies was just a point higher at 78 after plummeting five points from last year, a drop of 6 percent. Declines in customer loyalty and perceived value contributed to the fall.

Perhaps the many mergers and acquisitions will give these stores more resources to improve customer satisfaction.

The elephant in the room

In the end, M&A in the health and personal care space, as well as the improvements in service quality and meeting customer expectations, are all about Amazon. The potential for the dominant internet retailer to enter the space and push out any and all competitors has many companies making big moves to shore up their ranks.

If Amazon steps into the space, a focus on customer satisfaction will be critical to winning customer loyalty and dollars.

Sears: Will it be Lights Out or Back in the Groove with Customers?

Sears, once a stalwart American brand, is currently a shadow of its former self, having fallen on hard times with both shoppers and investors alike. Back in 2001, Sears was tied for second among department and discount stores in terms of customer satisfaction, according to the American Customer Satisfaction Index. Since then, the chain has managed to beat the industry average only once in 14 subsequent years.

Looking at the last decade of ACSI scores and stock performance for Sears, the period from 2009 to 2013 shows customer satisfaction trending upward by 4% while stock price falls over 57%. The reason for this outcome lies in the connection between stable, or even increasing, customer satisfaction and a dwindling customer base.

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Customer satisfaction plays a vital role in competitive industries in large part because consumers can vote with their feet. That is, customers who do not like a company’s service can simply go elsewhere. The ACSI measures a company’s customer satisfaction by talking directly to the customers themselves. In situations where unhappy consumers leave en masse, the only remaining customers are the ultra-loyal.

In the case of Sears, these loyal customers are likely patronizing the store for reasons other than satisfaction, such as price, proximity, or tradition. In such situations, a rise in customer satisfaction can indeed coincide with a decrease in revenues—a red flag in terms of future financial performance. As dissatisfied customers defect to competitors, the diminished pool of customers includes a greater percentage of shoppers who like the experience for a specific reason. During the period 2009 to 2013, the rise in customer satisfaction for Sears coincides with a steady depletion in sales.

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In recent years, even the most loyal Sears shoppers have seen their satisfaction decline. The company now ranks second-to-last among department and discount stores. With an ACSI score of 71, Sears beats only Wal-Mart at the low level of 66. In comparison, industry leaders Nordstrom and Dillard’s score 80 or higher. It is no surprise to see Sears report terrible earnings for the third quarter of 2016. For Sears, the challenge ahead lies with improving the customer experience. Unless the company succeeds in becoming more customer-centric, it is unlikely that Sears’ faltering financial position will turn around.

Retail Sector Retreats to Long-Term Shopper Satisfaction Levels

ACSI’s February report on the retail sector shows customer satisfaction down 2.6% year over year for the 2015 holiday season, as consumers may be looking for more in their shopping experiences. Shopper satisfaction overall hit a high mark two years ago amid a post-recession economy where businesses were trying harder to please customers.

As recovery settles in, that honeymoon is over and five of six retail categories return to customer satisfaction levels that align with long-term ACSI averages. While most retailers show ACSI declines compared with 2014, consumers continue to prefer the online shopping experience.

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